May 06, 2009

April 27, 2009

Nearly (truly?) alone at CNBC, David Faber appears willing to entertain the possibility that the recent/ongoing rally in equities is something other than the bright light at the end of the tunnel. A few minutes ago, he interviewed Willem Buiter, whose maverecon blog at FT.com is a must-read.

Here's a Buiter line from the Faber interview that rang true to our probability-minded shop: "While everything is possible, not everything is likely." Indeed.

And here's the item Faber referenced, whose title ("The green shoots are weeds growing through the rubble in the ruins of the global economy") wins the award for Best of 2009 So Far.

Understand that the money that the government is throwing around represents a transfer of wealth
from an unwitting public to the bondholders of mismanaged financial
corporations, even while foreclosures continue. Even if the Fed buys up
the Treasuries being issued, and thereby "monetizes" the debt, that
increase in government liabilities will mean a long-term erosion in the
purchasing power of people on relatively fixed incomes.

To
a large extent, the funds to defend these bondholders will come by
allowing U.S. businesses and our future production to be controlled by
foreigners. You'll watch the analysts on the financial news channels
celebrate the acquisition of U.S. businesses by foreign buyers as if it
represents something good. It's frustrating, but we are wasting
trillions of dollars that could bring enormous relief of suffering,
knowledge, productivity, and innovation in order to defend bondholders
of mismanaged financials, and nobody cares because hey, at least the
stock market is rallying. If one thing is clear from the last decade,
it is that investors have no concern about the ultimate cost of the
wreckage as long as they can get a rally going over the short run.

April 01, 2009

"Anything too big to fail is too big to exist." So writes Simon Johnson in "The Quiet Coup," an important, provocative piece in the May issue of The Atlantic.

We think that's pretty much the line of the year, and it points to the importance of bringing financial institutions--and, in some ways, finance itself--back down to a more appropriate size. "The Obama administration's fiscal stimulus evokes FDR," Johnson writes, "but what we need to imitate here is Teddy Roosevelt's trust-busting."

How did we get here? This is just the beginning:

In its depth and suddenness, the U.S. economic and financial crisis
is shockingly reminiscent of moments we have recently seen in emerging
markets (and only in emerging markets): South Korea (1997), Malaysia
(1998), Russia and Argentina (time and again). In each of those cases,
global investors, afraid that the country or its financial sector
wouldn't be able to pay off mountainous debt, suddenly stopped lending.
And in each case, that fear became self-fulfilling, as banks that
couldn't roll over their debt did, in fact, become unable to pay. This
is precisely what drove Lehman Brothers into bankruptcy on September
15, causing all sources of funding to the U.S. financial sector to dry
up overnight. Just as in emerging-market crises, the weakness in the
banking system has quickly rippled out into the rest of the economy,
causing a severe economic contraction and hardship for millions of
people.

But there's a deeper and more disturbing similarity: elite business
interests--financiers, in the case of the U.S.--played a central role in
creating the crisis, making ever-larger gambles, with the implicit
backing of the government, until the inevitable collapse. More
alarming, they are now using their influence to prevent precisely the
sorts of reforms that are needed, and fast, to pull the economy out of
its nosedive. The government seems helpless, or unwilling, to act
against them.

Top investment bankers and government officials like to lay the
blame for the current crisis on the lowering of U.S. interest rates
after the dotcom bust or, even better--in a "buck stops somewhere else"
sort of way--on the flow of savings out of China. Some on the right like
to complain about Fannie Mae or Freddie Mac, or even about
longer-standing efforts to promote broader homeownership. And, of
course, it is axiomatic to everyone that the regulators responsible for "safety and soundness" were fast asleep at the wheel.

But these various policies--lightweight regulation, cheap money, the
unwritten Chinese-American economic alliance, the promotion of
homeownership--had something in common. Even though some are
traditionally associated with Democrats and some with Republicans, they
all benefited the financial sector. Policy changes that might
have forestalled the crisis but would have limited the financial
sector's profits--such as Brooksley Born's now-famous attempts to
regulate credit-default swaps at the Commodity Futures Trading
Commission, in 1998--were ignored or swept aside.

March 25, 2009

The recent rally in equities has returned a certain sense of non-Armageddon to the markets. That's clearly a good thing. But before anyone gets too pleased with all this "better-than-expected" data, let's be serious about what's happening out there. A few relevant items:

Mortgage equity withdrawals, and the consumer spending they support, are effectively zero. In the long run, that's a good thing, because it should improve household balance sheets. In the short run, it gives consumers less room to maneuver.

Let's be clear here. We welcome good news, and some recent reports have indeed been less-horrific than "expected." And we know that Wall Street often moves in relative terms, with underlying expectations providing the backdrop against which traders and investors operate in the short term. But as we noted in a recent post, the likeliest outcome is a slow-growth environment for some time to come.

Bottom line: This is a bear market until it proves otherwise.**

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* This is not a typo. We could have gone with "dark," but dank is one of our favorite words. Always has been.

** And yes, we kow markets often move in advance of the broader economy (let alone the release of certain types of economic data, which often lag the underlying things they're trying to measure). That may be what they're doing here. But in the absence of demonstrated, robust leadership by stocks and industries--as opposed to snapback rallies of the most beaten-down securities--we'll remain a little bit cautious.